Krugman: Economy Risks 'Permanent Depression'

Monday, 18 Aug 2014 09:38 AM

By Dan Weil

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The economy isn't close to recovered from the 2008 financial crisis, and government policy that is too tight could really throw a wrench into things, says Nobel laureate economist Paul Krugman.

"Recovery is far from complete, and the wrong policies could still turn economic weakness into a more or less permanent depression," he writes in The New York Times.

"In fact, that's what seems to be happening in Europe as we speak. And the rest of us should learn from Europe's experience." The eurozone reported zero growth for the second quarter.

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Krugman thinks that Fed Chair Janet Yellen gets it. "She has made it clear that she would rather take the chance of a temporary rise in the inflation rate than risk hitting the brakes too soon," he writes.

"The bad news is that she and her colleagues are under a lot of pressure to do the wrong thing from the too-muchers, who seem to have learned nothing from being wrong year after year, and are still agitating for higher rates," Krugman adds, referring to those who believe the things governments and central banks are doing are setting the stage for something even worse.

The Fed has kept its federal funds rate target at a record low of zero to 0.25 percent since December 2008.

Steven Wieting, global chief strategist for Citi Private Bank, sees some trouble ahead for the economy, though he speaks in less dire terms than Krugman.

"I hear more and more that this is going to be an endless bull market, that there are no cyclical downturns," Wieting tells CNBC. "I think the evidence we've had this year is that, in fact, we have a finite recovery."

He predicts the economy will endure another recession before the "decade is out."

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